So many
shoes are poised to drop this week that the American scene might be
confused for the world's greatest-ever clog dancing festival, but a
closer look will reveal a circle of cavorting skeletons.

Last week's ripe moment turned out to be the Thursday night Washington
photo op when Treasury Secretary Paulson and Fed Chief Bernanke emerged
from a huddle with House Speaker Nancy Pelosi and just about every
other legislative eminentissimo in an attempt to reassure the nation
that its financial system had not turned into something like unto a
truckload of stinking dead carp. I don't know about you, but I got two
distinct vibes from the faces in that particular tableau: 1.) abject
fear, and 2.) a total lack of conviction that they knew what they were
doing.
The product of that huddle was a cockamamie scheme for the US treasury
to absorb all the losses from a twenty-year binge in which Wall Street
created and retailed the most complex set of swindles ever seen on this
planet Earth. The background music to the tableau was the whoosh of a
several trillion dollars exiting the US financial system never to be
seen again.

The next day (Friday) many particulars of that scheme began to emerge
-- such as the complete lack of oversight and review mechanisms for
Treasury's new power to monetize private business failures and frauds
-- and the stock market soared in response. Other new features of the
reformed capital landscape also resolved later that day, like a new
experiment aimed at eliminating the short sale as a way of guaranteeing
that henceforth market bets could only be placed on the upside of the
table. It will be interesting to see how that reform works out in the days ahead.

Over the weekend, all these various playerz retreated into their gilded
bunkers to negotiate the details, and by Sunday night, among other
things, Goldman Sachs and Morgan Stanley -- the two remaining
investment giants left standing -- announced that they would
metamorphose into regular banks in order to qualify for additional
truckloads of government loans in exchange for any leftover fraudulant
securities still lurking in their vaults. Another new provision had the
Treasury rescuing swindled foreign companies, too -- in effect, saving
the world, which seemed at least, how you say, pretty ambitious.

By this morning, many new arguments had been raised by a suddenly
de-zombified congress as to whether the proposed grand bail-out might
reward recent Wall Street turpitudes and incentivize future mis-deeds
and it looks like enough objections may be lodged to gum-up the process
before it even goes into effect -- which, of course, would tend to
revert the whole reeking cargo of trouble to its original train-wreck
trajectory. I guess we'll see what happens now.

Any way you paint this grotesque panorama, it looks like a very new
chapter of history for life in the USA. Basically, we are a much poorer
nation than we were even a couple of years ago, and we have a
much-reduced ability to project our will around the world, or even
among our own floundering sectors and regions. Most troubling to me is
the question of legitimacy that now hangs over the proscenium like a
guillotine blade. Factoring in the old saw that history doesn't repeat
but it rhymes, I think the situation emerging is rather like the crisis
of legitimacy that preceded the Civil War. Then, in the 1850s, the
nation's two symbiotic political parties, Whig and Democrat, entered a
zone of fatal discredit. The White House had been occupied by a
sequence of empty cravats named Fillmore, Pierce, and Buchanan, and so
much pent-up mistrust roiled the centers of power that the nation
entered a convulsion.

At issue then was the great festering unresolved polity of slavery. The
Whig party, in its oafish, craven fecklessness, disappeared so quickly
from the scene that an embarrassed God Almighty seemed to have hooked
it off-stage in a nanosecond. Into the vacuum stepped an awkward lawyer
from Illinois -- widely mocked by the coarser elements of what was then
called the press as a figure resembling an ape in a stovepipe hat. He
accomplished one crucial thing in the process of his emergence: he
deployed a potent rhetoric that captured the essence of the crisis and
clarified it for all to understand what was at stake -- and then the
convulsion commenced in earnest.

The Republican Party amounts to today's Whigs. Their candidate for
president, John McCain, is trying to run away from his own party -- as
one might shrink away from a colony of importuning lepers. I am
actually not kidding when I label the Republicans "the party that
wrecked America," because I believe that is truly how the popular
strain of history will regard them when (maybe if) the wreckage of
their ministrations ever clears. But history doesn't repeat exactly.
The current figure from Illinois, Barrack Obama, has yet to offer a
truly crisis-clarfying rhetoric, though he labors under the expectation
of being able to do so. Like his long-ago predecessor, he is mocked by
the coarser elements of what we call "the media" these days -- Fox News
and the moron-rousers of talk radio.

Some of the issues yet-to-be-clarified concern the behavior of the
American public in the broad sense. We have obdurately resisted the
reality of the energy crisis that hangs over everything we do (as
slavery hung over the 1850s), from the way we inhabit the landscape to
the way we do daily business in our 240-million-plus fleet of cars and
trucks that ply the ribbons of asphalt and the lagoons of parking that
now run from sea to shining sea where the fruited plain was replaced by
the Wal Marts.

Mr. Obama isn't kidding either
when he alludes to the change America faces, though history has not yet
rhymed enough for his rhetoric to really set forth the terms of this
change in its stark particulars. And even if he is able to articulate
these things, he won't forestall the convulsion anymore than Lincoln
held back a war between the states. That prior crisis was when America
learned good and hard how tragic life could be, and it colored our
national character for a century -- until we chucked it all to become a
society of overfed clowns, with God Almighty replaced by Ronald
McDonald. That pageant of happy idiocy is now ending. Like everyone
else in this fraught and nervous land, I'm standing by to see what
transpires in the days just ahead.

(http://kunstler.com/mags_diary24.html)
It turns out the real hurricane blew through Wall Street last week, not
Galveston. This morning, Manhattan is strewn chest-deep with the debris
of banking and at this hour (seven a.m.) nobody knows how far, deep,
and wide the damage will spread. The fear, of course, is that we are
witnessing a classic "house-of-cards" or "dominos-in-a-row," situation,
and that the death of Lehman Brothers and Merrill Lynch will cascade
into a generalized collapse of the entire consensus of value that
supports mediums of exchange.

At least one thing ought to be clear: this has happened due to the
negligence and misfeasance of the regulating authorities, namely the
Republican Party, and that now all the hoopla surrounding Sarah Palin
can be swept away revealing that group to be what they actually are: the party that wrecked America.
I hope one or two Barack Obama campaign officials are reading this
blog. You must commence the re-branding of the opposition right now.
The Republicans must be clearly identified as, the party that wrecked America.

Many things happening this week will be interesting to see and hear,
but just now an outstanding question is how on earth can the Bank of
America buy Merrill Lynch for $50 billion after assuming the
liabilities of the tarbaby known as Countrywide? But that little detail
may be lost in the din as other banks and bank-like organizations start
crashing like sequoia trees in a national forest.

I wish I knew whether this extravaganza of ruin might settle the
question as to whether America goes into hyperinflation or implacable
deflation, but the net effect is that money is leaving the system in
big gobs. And if not money per se, then the idea of money as
represented in certificates, contracts, counter-party positions, and
gentlemen's agreements. This is the day that America finds itself a
much poorer nation. The capital we thought was there, is gone.

A lot of it was actually translated over the years into Hamptons
villas, Gulfstream jets, and other playthings that will now go up on
Ebay or some equivalent as we turn into Yard Sale Nation in a general
liquidation of remaining assets. Of course, the trouble in a situation
like this, where absolutely everybody is trying to pawn off assets, is
that there are very few buyers on the scene, so the prices of all these
things go down down down. Everything is for sale and nobody has any
money.

This was essentially the
state of things in the Great Depression of the 1930s, and the only
escape from that turned out to be the mobilization for war. And in the
aftermath of that terrible war, we were the only industrial nation that
hadn't been bombed to rubble. What's more, we had a very handsome
supply of industrial world's primary resource, oil, at our disposal. So
we spent the next thirty years making oodles of things and selling them
to people in other lands (lending them the money to buy), until these
nations were back on their own feet and solvent. And after 1975, the
industrial club picked up a bunch of new members and they all began to
clean our clock.

So, as our industrial base waned, and our factories got old and
brittle, and our labor force was steeply under-bid by cheaper labor
forces, we embarked on a quest for "the new economy." This was
represented in successive turns as the information economy, the
consumer economy, the high-tech economy, et cetera. They were all
ruses, aimed at concealing the truth -- which was that we had become a
society no longer producing things of value, no longer generating real
wealth. The final act of this farce has been the so-called "financial
industry."

That "industry" turned out to be most earnestly devoted to the
production of complex swindles. They were so finely engineered that it
took twenty years for the swindles to stand revealed, and they were
cleverly hitched to the primary thing that the American public vested
its identity in: house-and-home. Thus, much of the public finds itself
in very real danger of becoming homeless and broke.
We generally recognize that some wicked-massive transfer of wealth
occurred in the process of the mortgage fiasco, but it remains to be
seen whether any residue of this wealth can actually be retained, as
represented by currencies, contracts, and supposed securities. The
wholesale settling of debt now underway may leave an awful lot of this
stuff with no value.

We should be frightened by the political implications of this Great
Implosion of presumed wealth. Some group of somebodies will have to
clean up this mess. Moving toward a major election, it is hard to
imagine the American people giving the clean-up task to the very group
that created the mess -- no matter how many cute little faces Sarah
Palin can make on TV. Both parties have so far managed to ignore the
gathering crisis of banking and money, but they can't ignore the
sequoia trees crashing down around their ankles and shaking the earth
they stand on.
At issue now will be the question of legitimacy in all its human social
dimensions. Is our money legitimate? Is the authority of our elected
officials legitimate? Are our values and ideas legitimate? These are
the things that will determine what kind of future we find ourselves in.

So, to begin this process, and to clarify the situation, I urge readers
of this blog to identify the Republican Party by its new brand-name: the party that wrecked America.
At least, then, we can reinstate one cardinal value into the juddering
structure of what we claim to believe: that actions have consequences,
that you can't just swindle and loot a society and walk away with the
swag.

Spread the word, change the tone of this campaign, and keep posted. This will be a momentous week.

Why do
the big deals always happen over the weekends? So the big boyz in
government and finance can take off their neckties when they bargain
with each other? So the markets will be closed and unable to register a
response one way or another? So the shrinking fraction of the US public
that pays attention to anything besides Nascar and pornography won't
catch the news Saturday evening?

This weekend's big
deal was the US government taking over the "government sponsored
enterprises" (GSEs) Fannie Mae and Freddie Mac that guarantee trillions
of dollars in mortgages. The "guarantee" is supposedly accomplished by
converting bundles of mortgages from the banks and loan companies that
originate them (that make the contracts with the buyers of houses) into
bonds that can be sold downstream. Risk was theoretically dispersed
among the holders of these bonds. This all seemed to work during the
long stable period when our cheap oil economy was chugging along, and
house prices maintained a consistent relationship with incomes, and
people paid their mortgages dependably. The whole system ran like a
reliable machine -- like a Chrysler slant-six engine!

Until the cheap oil age came to an end. Then, all parts of the system
shook apart. It was the end of cheap oil that catalyzed the housing
collapse and, by extension, the current huge financial crisis. But the
run up to it was like a bounce off a high diving board into an empty
pool. The bounce came around 2001 when it became apparent that the US
standard-of-living could not be maintained on incomes in a
post-cheap-oil economy.

The
trauma of 9/11 prompted a new and utterly insane consensus to form that
the US standard of living could be switched over from income to massive
debt. All the normal brakes against irresponsible lending and borrowing
came off -- embodied in Alan Greenspan's absurd statement that it was a
good time to assume an adjustable rate mortgage when interest rates
were at a historic low -- meaning they could only be adjusted upwards.
Why hold Greenspan responsible? Because he was at the apex of the
authority vested with establishing norms, and he shoved our behavior
into the realm of the recklessly abnormal, and he should have known
better.

The public went along with it because "free money" and high living are
fun. Their behavior was reinforced by other authorities -- for
instance, President Bush, who told Americans to go shopping after the
9/11 attacks. (They went shopping with credit cards.) Things really
wobbled in 2005 -- which was, coincidentally, the year of all-time
world-wide peak conventional oil production -- with hurricanes Katrina
and Rita ripping through the Gulf of Mexico oil rigs as a dramatic
highlight. (It was also the year that The Long Emergency was
published.)

Since then, the US economy and the financial part of it that became a
nine hundred pound tail wagging a thirty-pound dog, has been held
together with baling wire, duct tape, and band-aids. All the debt run
up by all parties -- home-owners, credit-card holders, business, banks,
hedge funds, government -- is not being paid back reliably, and all the
leveraged arrangements that depend on it being paid back are coming
apart. Thus, capital disappears. The
wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society.

Fannie and Freddie are near the center of this black hole of debt. So
far, the black hole has been "papered over" by the old stage magician's
trick of diverting the audience's attention. The systemic wound that
Bear Stearns represented, was covered up with a band-aid applied by the
Federal Reserve's exchange of loans for worthless securities. In fact,
the capital of Bear Stearns actually did disappear -- a mere residue of
it, a few cents on the dollar, was shifted to JP Morgan as payment for
taking the wrapper off the band-aid. But, basically, the money is gone.

Now, the same thing has happened with Fannie and Freddie, except that
the scale is an order of magnitude greater. This time, the US Treasury
Department is assuming worthless paper and paying out much larger loans
to enterprises that are functionally bankrupt. The exact nature of the
government's chartered "sponsorship" has always been ambiguous.
Professional opinion has generally held that government backing was
implied rather than explicit -- but that's a ridiculous internal
contradiction that went unchallenged for decades as Fannie and
Freddie's Ponzi-style operation lumbered on (and their executives made
off with obscene payouts). Now the government's role has suddenly been
made explicit. It will probably only make things worse, since the
enterprises are too big and over-scaled to work under any
circumstances, let alone insolvency.

One thing this points to is a truth that is uniformly overlooked by
kibitzers: that what we developed over the past decade in America was
not an "information economy" or a "consumer economy" but a suburban
sprawl building economy, meaning an economy dedicated to building a
living arrangement with no future. The climax of the sprawl building
economy occurred in absolute lockstep with the climax of peak oil. You
can date it virtually to the month -- May, 2005. After that, the future
asserted itself and all the financial expectations bound up with
sprawl-building went up in a vapor -- including the value of mortgages
on suburban houses. Everything that followed has been an attempt to
cover up this basic reality: that the way we live in America can't
continue.

The reason our energy debate is so hollow and idiotic is because we
can't face this basic reality. The fantasy-du-jour among both political
parties is that we can become "energy independent." By this they mean
we can keep on living the way we do by means other than oil. This is
just not true. We have to make profound changes in everything we do
from the way we inhabit the landscape to the way we produce our food.
Lately, the only change we've shown any interest in is changing what
our cars run on. But that is not going to rescue us, not even a little.
Our inability to talk about anything else except the cars will drag us
down into poverty and turmoil.

The housing market is not coming back. Ever. In the form that we knew
it. The suburban project is over. That version of the American Dream is
over. We'll be a lot better off if we put aside dreaming altogether for
a while and start focusing on reality instead -- that part of the day
when we're awake and capable of actually doing things. We've got a lot
to face and a lot to do.

The government takeover of Fannie and Freddie is just another
papering-over of our fundamental problem -- that until we embark on new
ways of being a nation, of living differently and working differently
on different things, the other nations of the world will not have
confidence in us, or the paper we issue, and we will not really have
confidence in ourselves.

I have believed all along -- and said as much in The Long Emergency --
that we would not get through this crisis without passing through a
period of hardship. We're entering it now. Even if the stock markets
shoot up five hundred points today on the basis of the Fannie-Freddie
deal (and the mistaken belief that our troubles are over), we are only
at the beginning of a very painful workout. Personally, I think we're
in for financial carnage before the election. The Fannie-Freddie deal
may be the place where the wheels really come off.